Tax Incentive Holiday Cottages for Sale
INTRODUCTION | DIFFERENTIATING FACTORS | TAX INCENTIVE EXAMPLES | GLEANN BHREANDAIN | DOWNLOAD BROCHURE
LISDOONVARNA HOLIDAY COTTAGES, LISDOONVARNA, CO. CLARE
TAX INCENTIVE HOLIDAY COTTAGE DEVELOPMENT-EXAMPLE
Summary
- Purchase price (excluding VAT and Fit-Out) € 280,000
- Qualifying Expenditure (Excluding Fit-Out) € 252,000
- Cost of Fit-Out € 15,000
- Guaranteed rent for 5 years € 8,000
Finance Assumptions
- Investor borrows 75% of purchase price on an interest only basis
- Investor funds the stamp duty cost and legal fees from personal funds.
- The investor has capacity to utilise the capital allowances and interest on borrowings at the top rate of income tax
- Interest rate variable at 4%
Example
Capital Allowances:
Annual Allowance on holiday cottage - €25,200
Annual Allowance on Fit-Out - €1,875
Total Allowances per annum - €27,075
Financing:
Total Borrowings (€280,000 plus fit out of €15,000 x 75%) - €221,250
Loan Interest - €8,850
Guaranteed Rent - (€8,000)
Excess Rents - €850
Annual Cashflow - Illustration Only:
Total Allowances per annum - €27,075
Excess Rents - €850
Interest Restriction (capped at 75% of interest) Relief since last budget - (€2,213)
Tax deduction available against other rents - €25,713
Tax savings at 49% (Tax 41% plus PRSI 3% plus Levies 5%)* - €12,599
Variable depending on being self employed.
Potential cash savings after tax relief - €12,599
TAX INCENTIVE HOLIDAY COTTAGE DEVELOPMENT-EXAMPLE
LISDOONVARNA HOLIDAY COTTAGES, LISDOONVARNA, CO CLARE
Illustrative Case V computations for an Investor with two other rental properties
Before Purchase € |
After Purchase € |
|
| Rental Income - Commercial Property, say | 35,000 |
35,000 |
| Rental Income - Residential Property, say | 10,000 |
10,000 |
| Gleann Bhreadain Guaranteed Rents | 8,000 |
|
45,000 |
53,000 |
|
| Interest Relief (Restricted to 75% x €8,850) | (6,638) |
|
| Net Rental Income | 45,000 |
46,363 |
| Less Capital Allowances | (27,075) |
|
| Taxable Rental Income | 45,000 |
19,288 |
| Tax Payable @ 49% (Ignoring Income Levies) | 22,050 |
9,451 |
| Tax Savings (€22,050 - €9,451) | 12,599 |
Notes and Assumptions:
(1) Each owner will be required to enter into a lease with a management company (subject to a break clause at end of year 10)
(2) Each owner will be a shareholder in the management company
(3) VAT reclaimable in full subject to satisfaction of conditions
(4) A VAT repayment can arise if the property is sold before the end of the long lease in situations where the property is not let under a continuing lease
(5) Unused relief can be carried forward indefinitely and used against Irish source rental income
(6) Assumed top rate of income tax of 41% plus PRSI at 3% (some investors may not be liable to PRSI)
(7) Assumed levies at 5%. Individuals with income less than €75,036 pay levies at 4%
(8) Claw back of capital allowances if the property ceases to be a qualifying holiday cottage within 10 years
(9) Investors should take their own independent professional advice as to the suitability of the investment
(10) A detailed tax opinion of the taxation issues involved has been prepared by Cahill Taxation Services based on current tax legislation
(11) Individuals will be liable to additional Income Levies on rental income. Capital Allowances not available for offset against income levies
(12) Assumed that interest is restricted to 75% on basis that holiday homes regarded as “residential premises” for interest relief purposes
LISDOONVARNA HOLIDAY COTTAGES - SAMPLE CASHFLOW
| Year | Yr1 |
Yr2 |
Yr3 |
Yr4 |
Yr5 |
Yr6 |
Yr7 |
Yr8 |
Yr9 |
Yr10 |
Total |
| Total Cost | (295,000) |
(295,000) |
|||||||||
| Bank Loan | 221,250 |
221,250 |
|||||||||
| Stamp Duty | (10,850) |
(10,850) |
|||||||||
| Legal Fees | (1,500) |
(1,500) |
|||||||||
| Tax Savings - Capital Allowances | 13,267 |
13,267 |
13,267 |
13,267 |
13,267 |
13,267 |
13,267 |
13,267 |
12,348 |
12,348 |
130,830 |
| Rent | 8,000 |
8,000 |
8,000 |
8,000 |
8,000 |
4,200 |
4,200 |
4,200 |
4,200 |
4,200 |
61,000 |
| Interest Payable | (8,850) |
(8,850) |
(8,850) |
(8,850) |
(8,850) |
(8,850) |
(8,850) |
(8,850) |
(8,850) |
(8,850) |
(88,500) |
| Tax on Rents | (668) |
(668) |
(668) |
(668) |
(668) |
1,194 |
1,194 |
1,194 |
1,194 |
1,194 |
2,634 |
| Value of Unit | 295,000 |
295,000 |
|||||||||
| Loan Repaid | (221,250) |
(221,250) |
|||||||||
| Total Cash Flow | (74,351) |
11,749 |
11,749 |
11,749 |
11,749 |
9,811 |
9,811 |
9,811 |
8,892 |
82,642 |
93,614 |
| Internal Rate of Return | 14.5% |
||||||||||
| Gross Rent Yield on Cost | 4% |
||||||||||
| Capital Allowances Claim | |||||||||||
| Fixture & Fittings | 1,875 |
1,875 |
1,875 |
1,875 |
1,875 |
1,875 |
1,875 |
1,875 |
15,000 |
||
| Building | 25,200 |
25,200 |
25,200 |
25,200 |
25,200 |
25,200 |
25,200 |
25,200 |
25,200 |
25,200 |
252,000 |
| Total | 27,075 |
27,075 |
27,075 |
27,075 |
27,075 |
27,075 |
27,075 |
27,075 |
27,075 |
25,200 |
267,000 |
| Tax Savings @ 49% - Capital Allowances | 13,267 |
13,267 |
13,267 |
13,267 |
13,267 |
13,267 |
13,267 |
13,267 |
12,348 |
12,348 |
130,830 |
Assumptions:
a) Total cost of property is €295,000 with the cost of buildings being €280,000 fitout cost €15,000.
b) Stamp Duty is payable as follows; Excess over €125k @ 7% in line with the new rules effective from 5-12-07
c) The investor obtains bank debt of 75% of purchase price excluding VAT and stamp duty.
d) The bank debt is interest only and the rate of interest is at 4% per annum over the entire 10 year period.
e) The promoters pay a guaranteed rent of €8,000 per annum for 5 years.
f) The value of the property will be €295,000 at the end of the tax life of ten years at which price the purchaser will sell the unit.
g) Investor has sufficient rental income at the marginal rate of tax to absorb the building and fit out allowances respectively each year.
h) There are no significant changes in tax legislation.
i) Computations before management charges
j) Interest relief restricted to 75% (to be confirmed whether restriction applies to Registered Holiday Cottages)
K) Rent projected at 70% of profit after 5 year gurantee expires at €4,200